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TransDigm Prepares for More Possible Purchases

By Dan Caplinger – May 1, 2018 at 9:47PM

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Find out how the aerospace supplier did and what could lie ahead.

The aerospace industry has helped drive the entire U.S. economy forward in recent years, and the benefits go way beyond the best-known aircraft manufacturers. TransDigm Group (TDG -2.56%) supplies vital parts and components for aircraft manufacturing, and it too has watched its stock soar as investors continue to like the prospects for aerospace growth for the foreseeable future.

Coming into Tuesday's fiscal second-quarter financial report, TransDigm investors were looking for another quarter of solid performance from the aerospace specialist. TransDigm's numbers were mostly satisfactory, but the company also made a strategic move to generate more cash in order to replenish its war chest and possibly put itself in a better position to make future acquisitions if the opportunity arises.

Blue sky with plane and jet contrail, with words onward & upward and TransDigm logo.

Image source: TransDigm Group.

Here's how TransDigm did

TransDigm Group's fiscal second-quarter results were able to pick up from the poor performance last quarter. Sales rose 7% to $933 million, accelerating from the 4% growth pace TransDigm saw in the fiscal first quarter. Adjusted net income rose 25% to $210.8 million, and that produced adjusted earnings of $3.79 per share. That number compared favorably to the consensus forecast of $3.66 per share among those following the stock.

TransDigm's segments continued to see similar performance to what they've posted in past quarters. The commercial aftermarket business was the best performer from a revenue standpoint, posting a 15% jump in the segment's top line compared to fiscal 2017's second quarter. The defense business also did well, with a 5% rise in revenue. Yet once again, the commercial original equipment manufacturing segment was the weakest, posting a drop of 2% from year-ago levels.

Many of TransDigm's internal metrics were solid. Gross profit margin rose by nearly a full percentage point to 57.2%, with the company citing strength in sales of proprietary products that carry higher margin as well as improvements in productivity. Overhead expenses stayed relatively stable as a percentage of revenue, and although interest expense jumped 9% on a combination of greater amounts of outstanding debt and higher interest rates, pre-tax operating income was still up 15%. Tax reform added further boosts to the after-tax bottom line.

Can TransDigm keep climbing?

CEO Nicholas Howley expressed his general satisfaction with the results. "Our focused value-driven operating strategy continues to generate real intrinsic shareholder value," Howley said, "[and] the commercial aftermarket revenues were again quite encouraging." The CEO also noted that recent acquisitions of two aerospace businesses, Kirkhill and Extant Components Group, were announced during the quarter, and the sale of the Schroth unit was also completed. That should put the company in a better strategic position going forward.

Yet TransDigm might not be done. The company also said it expects to raise $700 million in new term loans and potentially add $500 million in subordinated debt as well. By doing so, TransDigm will successfully replace the cash it used to buy Kirkhill and Extent, giving it the latitude to make further acquisitions in the future if it chooses.

With its new bigger scope, TransDigm boosted some of its guidance. Sales should be between $3.74 billion and $3.82 billion, reflecting $95 million in expected new revenue from its acquired businesses. Adjusted earnings guidance got a $0.40 per share boost to a range of $17.35 to $17.99 per share.

TransDigm shareholders seemed content with the news, and shares didn't move much on Tuesday following the report. If the company can sustain growth in its strongest areas, then TransDigm has plenty more room to turn good conditions in aerospace into greater profit in the future.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends TransDigm Group. The Motley Fool has a disclosure policy.

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